Before Franchising in China: Verifying the ‘Two Stores, One Year’ Requirement and Evidence of Direct Operation

Before developing an existing business into a franchise network in China, head office should answer a basic question: which outlets can demonstrate genuine experience of direct operation? The ‘two stores, one year’ requirement is not simply a matter of counting shop signs or checking dates on business licences. It requires a combined assessment of each outlet’s ownership and control, actual trading activity and operating timeline.

1. Distinguish statutory requirements from internal assessments

Article 7 of China’s Regulations on the Administration of Commercial Franchising requires a franchisor to have a mature business model and the capacity to provide ongoing operational guidance, technical support, business training and other services. It must also have at least two directly operated outlets that have been operating for more than one year.

Outlet numbers and operating periods are therefore conditions that must be verified before franchising, but they are no substitute for assessing whether the business model is sufficiently mature. Even if two outlets meet the operating-period requirement, a business that still relies on constant firefighting to keep them open cannot assume it is ready to franchise.

The Measures for the Administration of Commercial Franchise Filing require documentary evidence that these conditions for directly operated outlets have been met. Businesses preparing to franchise for the first time should verify their eligibility before arranging to sign agreements. The filing deadline following the first franchise agreement should not be treated as a grace period for completing the required operating history.

Create an eligibility checklist with separate headings for ‘direct-operation relationship’, ‘actual operating period’, ‘supporting documents’ and ‘unresolved questions’. Avoid recording only a blanket conclusion of ‘compliant’.

2. Establish who actually operates each outlet

Start by listing the outlets you intend to rely on, then check each outlet’s registered entity, ownership links, operational management arrangements and financial records. A shared brand, standardised fit-out or centralised purchasing cannot, on its own, establish that an outlet is directly operated.

Organise the evidence around the following questions:

• Which entity is the outlet registered under, who operates it, and how are they connected to the proposed franchisor?
• Who signs the lease and pays the rent and day-to-day operating costs?
• Who manages staff, makes operational decisions and bears the business risks?
• Which entity receives sales revenue into its accounts, and how is that revenue recorded?

Business licences, corporate registration records, leases, staff management records and financial documents can each help establish the facts. This is a suggested set of documents for verification, not an exhaustive statutory checklist applied uniformly across China.

Do not assume that outlets operated by affiliated companies, acquired outlets or outlets held in a founder’s personal name will all qualify. Compile a complete account of the relationships between the relevant entities and the operational facts, then confirm the evidence requirements with the competent commerce authority. Where necessary, seek advice from a lawyer experienced in franchising. An internally issued ‘certificate of direct operation’ cannot replace the underlying facts.

3. Use a timeline to demonstrate actual trading

The establishment date shown on a business licence, the start date of a lease and the date trading formally began may differ. Create a separate timeline for each outlet you intend to count, recording registration, handover of the premises, trial trading and formal opening, as well as any closures, relocations or changes to the operating entity.

Support that timeline with corroborating business records, such as sales transactions, purchase documents, rent payments, payroll records and any operating permits required by law. A single opening-day photograph shows only a moment in time; it cannot independently demonstrate continuous operation.

Pay particular attention to two potential gaps. First, an outlet may have been registered for a year but spent much of that time being fitted out or prepared for opening. Second, a brand may have traded for many years while the outlet being counted has only recently opened or undergone a change of operating entity. A brand’s history cannot simply stand in for an individual outlet’s trading history.

Where there has been a lengthy closure, reopening at a new location or uncertainty over whether trading before an acquisition can count, set out the facts and dates clearly and confirm how the relevant requirements apply. Do not combine periods on your own initiative. Also distinguish between insufficient evidence and failure to meet the underlying requirement: the former calls for additional genuine records; the latter cannot be resolved by producing paperwork retrospectively.

4. Produce an internal conclusion that can be checked

Before proceeding with a franchise offering, arrange a joint review by operations, finance and legal teams. Operations should confirm actual trading activity, finance should reconcile income and expenditure records, and legal should examine the relationships between entities and any unresolved questions about eligibility.

For each outlet, the review should record at least: why it is proposed for inclusion, the evidence supporting its operating period, where the documents are stored, any inconsistencies and how they have been resolved. Where, for example, the entity named on the lease differs from the entity receiving sales revenue, explain the genuine reason rather than remove inconvenient documents.

You could classify outlets internally as ‘documents complete — ready for the next stage of verification’, ‘further evidence required’ or ‘not currently to be counted’. These are internal management categories only; they do not mean the competent authority has accepted the outlet as qualifying. If material questions remain, pause any signing arrangements that depend on a claim that the ‘two stores, one year’ requirement has already been met.

Ensure that franchise recruitment staff also use a consistent, reviewed statement of the facts. Do not present outlet numbers, trading history or filing status as a guarantee of profitability. Trust within a franchise network comes from verifiable facts, not claims of eligibility.

Practical takeaway: Confirm the direct-operation relationship for each outlet first, then verify its operating period against genuine trading records, and finally resolve inconsistencies and questions about eligibility. Treat ‘two stores, one year’ as a set of facts supported by an auditable evidence file, not merely a line in franchise recruitment materials.